Mastering the Complex Sale_3

TheDrivingForceofCommoditization 15 market is getting shorter and shorter. Competitors see a successful or improved product in the market and quickly match or exceed it. Another reason it is getting more difficult to differen-tiate products and services is that the buyer doesn’t want to differentiate them. The more complex products and ser-vices are, the harder it is for customers to compare and evaluate them. Analyzing and deciding between long lists of non-identical features can be very difficult and time con-suming, but simply comparing purchase prices is much eas-ier. This points us to the third cause of commoditization— the customer. Customers, especially purchasing departments, who are incentivized to drive down the price of goods and ser-vices, are always trying to level the playing field. They at-tempt to reduce complex and valuable solutions to their lowest common denominators for good reasons. When customers are able to convince suppliers that their offerings are essentially the same, they exert tremendous downward pressure on the price. For instance, if General Electric’s jet engines are the same price as Rolls Royce’s jet engines, and the customer can’t or won’t see any difference between the two, what must be done to win the sale? Unfortunately, the easiest path, and the one that takes the least skill to execute, is to cut the price, which is why so much margin erosion occurs at the point of sale. We’ve seen many businesses that have chosen such a path eventually fail. An example of the extreme impact that even the threat of commoditization can produce involves a company whose leadership team called me after its business had taken a dev-astating hit. This company’s technology became a standard in the chip manufacturing industry. It produced highly specialized capital equipment, sold about 300 units per year, and enjoyed a very large market share. When a com-petitor entered the marketplace offering the ‘‘same thing’’ 16 CAUGHT BETWEEN COMPLEXITY AND COMMODITIZATION for 32 percent less, customers used this premise to pressure the original manufacturer to lower its prices. Even though the company had a very valuable solution that was superior to the competitor’s, it was unable to connect and quantify that value in terms of the customer’s business and the com-pany ultimately lowered its price. This was a clear example of an outdated sales process that couldn’t make it in an Era 3 world. The company dropped the average selling price of its equipment by 30 percent during the following year, a move that cost $24 million. The irony of the story is that the upstart competitor was able to build only 15 units that year, which represented a 5 percent market share. If the original manufacturer had held its prices and even lost all 15 sales, it would have been about $20 million better off overall. What is interesting, or should I say tragic, is the strat-egy of ‘‘we can give you the same thing as the high-value supplier for 32 percent less,’’—it is probably one of the most feeble, yet most successful, sales premises. It only works because the customer cannot discern whether the solutions are ‘‘the same thing,’’ and the seller of the more expensive solution cannot clarify and defend its higher value. Customers also try to commoditize complex transac-tions for emotional reasons. Often they are in denial about the extent of their problems. Think in personal terms: If your stomach burns and you chew an off-the-shelf antacid and you feel better, you believe your problem was minor and easily solved. If you go to your doctor who discovers you have an ulcer, an increased level of clarity and fear is reached and your problem jumps to an entirely different level. Fear drives customers to try to commoditize transac-tions. It is human nature to find it difficult to admit when we don’t understand problems and/or solutions or admit to concerns about making changes in our current situations. Our customers are facing many different risks, whether CommoditizationIsaChoice 17 they change or not. They are unclear about these risks and hesitate to open up. They are often concerned about ap-pearing less than competent in front of us, their bosses, or their peers. As a result, when customers don’t understand something we tell them, they often simply nod and proceed to reduce the transaction to what they do understand—the purchase price. Finally, there is the emotional issue of control. We must recognize the negative stereotype of a professional salesperson that exists in many customers’ minds. Custom-ers are fearful that by acknowledging complexity and admitting their own lack of understanding, they will lose control of the transaction and open themselves to manipu-lative sales techniques. The simpler that customers can make a sale, the less they must depend on salespeople to help them. Commoditization, in this sense, is a way for cus-tomers to maintain control of the transaction and protect themselves. The net effect of all these causes of commoditization is the deadly spiral of shrinking profit margins. CommoditizationIsaChoice In Era 3, business-to-business sellers are desperately seek-ing competitive differentiation through increasingly sophis-ticated products and services. Meanwhile, their customers, working in a perpetual haze of confusion and performance pressure, are treating all solutions like commodities. This leaves your company with a critical choice—whether to embrace a core strategy that supports a price-focused sale or one that supports a high-value solution. Companies that choose the first alternative embrace the commodity sale as Dell did, as well as other companies, such as steelmaker Nucor, which in the late 1960s created 18 CAUGHT BETWEEN COMPLEXITY AND COMMODITIZATION an innovative mini-mill that enabled it to produce and sell steel at prices that Big Steel couldn’t come close to match-ing. With a commodity, the total transaction cost, includ-ing price, is the differentiating factor in the marketplace. As commoditization occurs, sales skills become less and less relevant, and transactional efficiency becomes the criti-cal edge. The professional sales force itself soon becomes a luxury that is too expensive to maintain. If your company has chosen to embrace commoditization as a dedicated strategy, reading this book is unnecessary. Instead, you should be aggressively pursuing the lowest cost structure and lowest selling price in your industry. Embracing the commodity sale is a dangerous strat-egy. If your company chooses it, it is limiting its opportuni-ties and may very well stifle its long-term potential. You need to constantly reduce your costs and prices, usually pursuing volume in order to operate successfully on razor-thin margins. Often you must simplify your value proposi-tions to generate this volume, which reduces your power to differentiate your offerings and opens the market to new competitors. Sooner or later there is always some new com-pany, like Dell or Nucor, which will figure out a way to do whatever it is you do cheaper than you can. A commodity sale should only exist because the seller con-sciously chooses it as a strategy. The other alternative that companies can choose—I believe it’s the only viable alternative for the vast majority of companies in Era 3— is to embrace the high-value strategy to fuel profitable growth. This doesn’t mean that the pressure of commod-itization will disappear. You will still have to cope with it and execute against it. Companies can only achieve this if their organizations are aligned to deliver on the value promise and their sales forces can clarify, connect, and quantify that value for customers. When this is done suc-cessfully, the high-value strategy becomes a sustainable CommoditizationIsaChoice 19 competitive advantage and the pressures of commoditiza-tion recede. In such a strategy, the differentiating factors are all the facets of value that a particular customer can realize from your solutions. Of course, the customer’s total cost remains an integral element in the overall value, but only when weighed against two other elements—the savings and/ or the revenue that your solutions can generate for the customer’s company. I refer to this as the total value of ownership or TVO. It is a significant advance beyond the total cost of ownership or TCO. TCO, as I will detail in Chapter 5, is a limited concept; TVO provides a more holistic view of value. I personally believe there is no such thing as a com-modity. Any product or service, even sand, can be turned into a high-value solution. Back in the 1980s, Rhone-Poulenc transformed the selling of industrial sand or silica, a money-losing commodity, into a high-value solution. Silica was used in the production of tires, and the company introduced a new product—highly dispersible silica—that reduced a tire’s rolling resistance enough to create a 9 percent rise in fuel efficiency. The company was able to sell this added value to its customers in the tire industry at a 75 percent premium to its competitors’ products.3 What we need to always remember, however, is that a defining characteristic of Era 3 is that our customerscannot recognize our high-value solutions without our help. Every high-value seller must provide its customers with the means to comprehend and measure the value it provides. Sellers who don’t do this will find themselves defenseless in the face of price competition. To embrace the high-value strategy and prosper in Era 3, companies need to recruit, develop, and equip sales and marketing professionals who can create value clarity for their customers. These professionals must provide ... - tailieumienphi.vn